Maine tax code overhaul aims to provide relief from high property tax with lower income tax

AUGUSTA, Maine — A bipartisan group of 11 lawmakers Wednesday unveiled a proposal to overhaul Maine’s tax code by lowering individual and corporate income taxes and eliminating the estate tax. The package makes up for much of the revenue lost by extending the sales tax to nearly all products and services and eliminating nearly all exemptions.

In the process, the five Democrats, five Republicans and one independent lawmaker involved said the overhaul would offer Maine residents some relief from continually growing property taxes.

The proposal is designed to shift more of Maine’s tax burden to part-time residents and tourists and provide tax relief for year-round residents, said Sen. Richard Woodbury, I-Yarmouth, the primary architect of the proposal.

“We wanted to encourage, reward and incentivize people who live and work in this great state,” Woodbury said during a State House news conference.

To that end, the plan slices the state’s individual income tax rate to a flat 4 percent — the highest rate now is 7.95 percent — and eliminates nearly all income tax deductions. The legislation also eliminates nearly all sales tax exemptions and raises the state’s 5 percent sales tax to 6 percent.

That means sales taxes would extend to cover groceries, heating oil, haircuts and a range of services that haven’t traditionally been taxed, and cigarette taxes would rise to $3.50 a pack from $2. In addition, the plan would phase out all economic development incentives offered through the tax code, Woodbury said.

The legislation — which has yet to be formally released — would raise taxes on hotel stays to 10 percent from Maine’s current 7 percent. And the package proposes raising the state’s homestead tax exemption to $50,000 as a way to relieve residents’ property tax burden. The homestead exemption currently exempts the first $10,000 of property value from property taxes for full-time residents.

The tax overhaul would be revenue neutral, so it would simply change how the state collects taxes, rather than the amount.

“It does raise additional funds to help fund the increase of the homestead exemption,” said Assistant Senate Republican Leader Roger Katz of Augusta, one of the 11 lawmakers in the group.

The overhaul attracted early praise for its bipartisan nature along with objections from groups at both ends of the political spectrum Wednesday. The so-called Gang of 11 includes legislative leaders from both parties, Katz and Democratic Senate Leader Seth Goodall of Richmond, along with lawmakers from both ends of the political spectrum.

The liberal Maine People’s Alliance praised the effort as an attempt to generate additional state revenues and potentially mitigate the impact of Gov. Paul LePage’s budget proposals on local property taxes. However, the group lamented the proposal’s reliance on an expanded sales tax and the measure to lower income tax rates and eliminate the estate tax.

“It doesn’t make sense to tax necessities like food in order to lower taxes for the wealthy and corporations,” Jesse Graham, the alliance’s executive director, said in a statement.

David Clough, who directs the Maine chapter of the National Federation of Independent Businesses, called the tax reform legislation “a bold first draft” and praised the income tax cuts.

“But we’re puzzled by the proposal to expand the sales tax and increase other taxes as a way to make up the revenue,” Clough said in a statement. “That would counteract the effect of lower income taxes and mitigate the effectiveness of the reform.”

House Speaker Mark Eves, D-North Berwick, and other Democratic leaders reserved judgment on the tax proposal but said it’s encouraging to see lawmakers from both parties coming together on a major initiative.

“The litmus test for Democrats is, is this going make the tax code more progressive or less progressive?” Eves said, adding that he wants to see more details.

Republican Senate Leader Michael Thibodeau of Winterport said policymakers should also focus the debate on state government spending.

“The question isn’t how we take the money from Maine people. The question is how much we take,” he said. “We’ve got to be careful that, through this effort, that isn’t lost in the debate.”

Richard Rosen, head of LePage’s Office of Policy and Management, said the governor would reserve judgment on the tax reform proposal until the formal wording is released.

Data from Maine Revenue Services show that sales and property taxes hit low-income residents hardest. In 2009, the average property tax bill for the bottom 20 percent of income earners amounted to 30.6 percent of their income, compared with 2.5 percent of income for the top 10 percent. The bottom 20 percent also paid about 3.7 percent of their income in sales and use taxes, compared with 1.3 percent for the top 10 percent.

The proposal’s changes to individual and corporate income taxes are more likely to appeal to Republicans. The legislation would lower the corporate income tax rate to 7.5 percent from the current 8.93 percent level, and it would eliminate the estate tax, which kicks in for estates valued at $2 million or more.

Rep. Gary Knight, R-Livermore Falls, said Maine’s tax system is long overdue for an overhaul that splits the tax burden more evenly among property, income and consumption taxes and creates a more stable revenue stream. Some 40.6 percent of taxes collected in Maine in 2010 were property taxes, compared with 28.7 percent sales taxes and 25.3 percent corporate and income taxes, according to the Washington, D.C.-based Federation of Tax Administrators.